Iceberg, right ahead!

There’s a glacier out there. It isn’t going to sink your boat, but it is sitting in the middle of the household balance sheet, freezing the income on savings.

Lara Rhame
June 12, 2016 | 2 minute read

There’s a glacier out there. It isn’t going to sink your boat, but it is sitting in the middle of the household balance sheet, freezing the income on savings.

Here’s the good news: The household balance sheet has finally regained ground lost during the Great Recession. In Q1 2016, household net worth climbed to $88.1 trillion.¹

Measured as a share of the U.S. economy, total household net worth is back to pre-financial crisis levels.² In 2007, wealth accumulation was driven by record gains in real estate.³

Against this backdrop of improved household wealth, however, is a potentially worrisome trend. Households have allocated a staggering 17% of financial assets, or $12.4 trillion,¹ to some of the lowest yielding assets in our financial system: savings, checking and money market accounts, and Treasury and agency debt investments. When viewed as a single asset class, the American household’s ownership of low-yielding assets has more than doubled since 2000,¹ with little signs of slowing.

These assets are traditional safe havens, and I believe a balanced portfolio should include some allocation to them. Historically, investors may have relied upon the income from these investments to meet monthly living expenses or help achieve long-term savings goals. Over the past seven years, however, yields on this asset class have plunged. Today, all of the assets in this category yield less than 3%, and 90% of these assets earn less than 1%.² Savings account deposits, which represent the largest segment of the category, earn 0.06% according to the FDIC.

Over the past five years, robust stock market returns have offset falling yields to keep overall wealth accumulation growing. Retirees hold most of the savings of our country, and they are now faced with two options. The first is to hope for another five years of robust stock market returns. The second option is to loosen some of the allocation in low-yielding assets that are, for all intents and purposes, returning nothing – or less than nothing when adjusted for inflation.

Why do I call it a glacier? Because the accumulation of low-yielding assets is enormous. Glaciers are frozen, so while these low-yielding assets are liquid, any income they could be generating has been frozen in this low-yield environment.

Accumulation of low-yielding assets

  • Federal Reserve Flow of Funds, Q1 2016.

  • Federal Reserve Flow of Funds, Q1 2016, and Bureau of Economic Analysis, Q1 2016.

  • Federal Reserve Flow of Funds.

  • Federal Reserve Economic Data, Bank of America Merrill Lynch, FDIC.

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Lara Rhame

Chief U.S. Economist + Managing Director

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